TechCrunch 50 startup Sprowtt has a radical, yet potentially compelling idea launching today—the startup lets ordinary startups and small businesses conduct a “Sprowtt IPO,” which is basically similar to the traditional IPO process.
Via Sprowtt, anyone can participate in the funding of companies. Potential investors log on to the site, set up a profile with detailed financial and bank account information. Then they are given a list of companies they can invest in based on their financial capabilities. Investors can check out videos of startups, the amount of money the startup has already raised, and their products and see detailed business plans, on which investors can share their comments. Potential investors can also access the offering circulars and shareholder agreements for the startup.
Once an investor decides to put money into a company, he signs the stock subscription agreement, enters the number of shares he wishes to purchase and then the funds are held in escrow until the offering is complete, which happens when the minimum amount for an offering is accumulated. Sprowtt helps to transfer the funds from an investor’s account to the startup.
The Sprowtt platform automates the entire stock offering process, including legal compliance in all states and with the SEC and draws up all of the legal documents (i.e. the shareholder agreement, offering circular) for the startups participating in the marketplace. But it’s not cheap for a startup to do this—Sprowtt says that if a company wants to sell $5 million worth of stock, it will cost them roughly $10,000-$25,000 in compliance fees to IPO.
When there are enough investors for a startup’s IPO, Sprowtt forms a company with these investors, and then invests the chunk of money as an entity instead of as individual investments . Also in the traditional IPO process, a company’s shares go on an exchange, like the Nasdaq, where they can be bought or sold. With Sprowtt’s IPO, there is no exchange, so it’s more of a private investment than an actual IPO.
Expert Panel Q&A (paraphrased)
The experts: Satish Dharmaraj, Lior Zorea, Bradley Horowitz, Tim O’Reilly, Kevin Rose
BH: These companies are all subject to the same restrictions in any other marketplace?
A: We’ve consulted with law firms, they crafted business model, everything is dealt with SEC and Federal government. It’s complex.
BH: Do you vet companies?
A: Yes, we do.
TO: I’m confused. This doesn’t change stock and compliance. Once you are public, you incur those costs.
A: The automation helps with this.
TO: Read Eric Ries’ blog to vet businesses.
SD: When someone buys shares, do they get dividends.
A: It’s all freely tradeable stock. Sort of an alternate to Nasdaq.
KR: How do you plan on attracted companies that aren’t oversubscribed?
A: It’s a big question for us-how to we keep best deals there. But this is a compelling model.
Jason: Which law firm has vetted this?
A: Working with legal counsel. We have had legal counsel in Silicon Valley that has a presence in DC with the SEC. There are things that the law firm will put their stamp on and some that they don’t.
LZ: I think IPOs are on their way back. It’s an interesting idea that other folks have looked at it. Based on my practice, I’m skeptical of this. Securities laws were put in place to protect the folks that didn’t have the means to lose their investments. There are difficult challenges in the securities side.
Video:
If you have over a certain number of investors, your company is subject to SarbOx, right?
Interesting idea. I wonder if it will gain enough of a substantial following/investors.
“With Sprowtt’s IPO, there is no exchange, so it’s more of a private investment than an actual IPO.”
That’s contrary to what the presenters said. They stated that the shares are freely tradable and in fact they are considering the creation of an exchange.
This seems like a lot of vaporware. There has to be a lot more info in the public – and a way to trade the shares ( if they are indeed freely tradeable) comparable to NASDAQ if that’s what they claim.
I really liked the idea i want to be able to invest in startups as well! i think that you can trade and have an IPO on here? These guys must be pretty smart if they found out a way to do this and silicon valley lawyers havent even found a way????
its a great idea, but, unfortunately, there is way too much government / SEC red tape to overcome.
By automating compliance and suitability at the federal and state level they’ve overcome the costs and legal challenges of a primary offering, and by having the thousands of micro-investors in a holding or “shell” company they make SEC reporting easy and make the equity exchangeable
As a securities/corporate lawyer for 15+ years, I would like to point out that there are significant securities-law issues that need to be addressed by Sprowtt. Indeed, unless the potential investors are “accredited investors” (as defined in Section 501 of Regulation D of the Securities Act of 1933), Sprowtt faces a pandora’s box of compliance and disclosure issues, under both federal and state law. Moreover, Sprowtt will likely be required to be registered with the SEC as a “broker-dealer” (which is expensive and time-consuming). In short, this is very trick stuff – and with the heightened scrutiny of the SEC and State securities regulators these days, I suggest that Sprowtt proceed cautiously. Thank you.
I cant imagine that VC funders would want to do business deals through their browser.
Of course, it would be awesome if it was only that easy.
Making investing easier doesn’t make the ton of crappy start ups write more useful software.
seems pretty cool. might be worth a try
“Sprott” is an established investment management company up here in Canada. They might not be too happy about the choice in names.
I am sure Obama would be a big fan of this people inspired venture capital model… they should do work to talk to him so they dont get shut down I hope this catches on. Just talked to a friend and he said must have a brilliant legal team to be working this out.. there is a way… these guys must have the will. Go Sprowtt.
I love the idea (and their website) and will surely give it a try… too bad it seems to be beta with a waiting list.
to Leena: is $25k in fees expensive to raise $5million ??
Last question: can we buy Spowtt shares on Sprowtt
Professional ibankers (like goldman or merrill) usually charges 7% for funds raised, in that case would be $350k. So $25k is hella inexpensive.
Video please.
If they can get past the red tape this will be a fucking amazing startup.
I’d invest.
im not sure how they didnt even get a mention. seems to be the only startup with an obvious business plan and a model thats actually innovative, if not disruptive. if they can really do what they want this is going f’ing huge.
Seem like sites such as RaiseCapital.com is much better and easier fit for Startups.
Not to mention a lot cheaper. Just $99.00 to post your capital needs for text, pix & video.
Plus they have over 4000 investors at RaiseCapital.com
Your obviously biased plug for Raise Capital makes your comment a bit dubious.
It’s really great that people are trying to revolutionize the capital industry. It’s so stale that there must be lots and lots of opportunities there. The main challenge is all the regulation surrounding it, that’s supposed to protect individual investors, but most of the time ends up just lining the pockets of lawyers and investment bankers.
I can also see why VCs would hesitate to invest – they understand the industry too well, so they can see all the risks all too clearly.
From a potential user’s pov, I think you have a classic chicken-and-egg problem on your hands. I would definitely consider using a service like that for my own startup – but only after there’s a track record of others who tried and succeeded.
Nice plug raisecapital…but seriously? Sprowtt just signed up 4000 people this afternoon. And, if you don’t know the difference between illegally posting your offering on craigslist, and legally registering a public offering and providing a platform to purchase and trade stock…well nm.
As the director of a company looking to get featured on Sprowtt, I have to say that the idea is perfect and a great way to start getting innovative and ambitious start ups the capital they need. Crowd sourcing has become a very popular concept for fund raising, so why can’t we apply that to businesses?
For everyone citing securities laws etc., I would say that you have to have a little faith that the company didn’t just forget about compliance and securities laws… The fact they’ve brought the company to this stage indicates that they’ve done their research and found a way to make this a reality.
Why are we stuck facing the cutthroat VC community when there are ordinary people out there ready to get behind a good idea?
I completely agree with Walker they must have done their homework in fact I heard that they have some pretty big SV names on their legal team. I think this could be one for the record books, this could really change the way the valley and the entrepreneurial community works in general
Going to be very interesting to have all these very tiny investors out there pumping stock.
By interesting I mean problematic…
But still, this is a great idea, lots of people have suggested the same to me, and I’m glad its finally happening.
Not sure a kid who just graduated from law school and then a bunch of big names who they have had lunch with translate to a committed and proficient “legal team” ….esp with the challenges they are up against.